S-Oil Corporation (KRX:010950) Could Be Riskier Than It Looks

It's not a stretch to say that S-Oil Corporation's (KRX:010950) price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" for companies in the Oil and Gas industry in Korea, where the median P/S ratio is around 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for S-Oil

What Does S-Oil's Recent Performance Look Like?

With its revenue growth in positive territory compared to the declining revenue of most other companies, S-Oil has been doing quite well of late. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Keen to find out how analysts think S-Oil's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like S-Oil's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 2.5% last year. Pleasingly, revenue has also lifted 33% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should demonstrate some strength in company's business, generating growth of 1.3% per year as estimated by the analysts watching the company. Meanwhile, the broader industry is forecast to contract by 0.1% per year, which would indicate the company is doing better than the majority of its peers.

Even though the growth is only slight, it's peculiar that S-Oil's P/S sits in line with the majority of other companies given the industry is set for a decline. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.

What Does S-Oil's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We note that even though S-Oil trades at a similar P/S as the rest of the industry, it far eclipses them in terms of forecasted revenue growth. There could be some unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. One such risk is that the company may not live up to analysts' revenue trajectories in tough industry conditions. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for S-Oil you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.